Fixed Deposits (FD): Meaning, Features, Benefits, Taxation and More

The Indian financial market is teeming with various investment options for beginners and seasoned investors alike. Of the many traditional investment avenues available today, fixed deposits (FDs) have been around for several decades now. Generations of investors have relied on FDs to preserve and grow their funds. 

In this article, we’ll take a closer look at what an FD is, the types of FDs available, the taxation and tax benefits of fixed deposits and more. 

What is a Fixed Deposit (FD)?

A fixed deposit account is an investment avenue that involves depositing a lump sum amount for a specified tenure. Over the tenure of the FD, you earn interest on the principal deposited in the account. This interest can either be reinvested in the account or paid out to you at regular intervals. 

At the end of the tenure of the fixed deposit, you can withdraw the principal along with the accumulated interest, if any. This facility is offered by banks and various financial institutions like NBFCs and housing finance companies. 

Types of FDs Available

Depending on the features, benefits and eligibility criteria, you can choose from different types of fixed deposits available in the banking sector. Here is a closer look at the common types of fixed deposits you can choose from.

• Standard Fixed Deposits

A regular or standard fixed deposit is one where you deposit a lump sum amount with a bank or financial institution and earn interest in return. The tenure of these FDs can range from 7 days to 10 years or more. You can choose to reinvest the interest (as with cumulative FDs) or to receive regular interest payouts (as with non-cumulative FDs).

• Senior Citizen Fixed Deposits

These are just like regular fixed deposits, except that they are specifically for individuals who are over the age of 60 years. The FD interest rates on senior citizen fixed deposits are typically higher by a few basis points than the rates on standard FDs. All the other features of a senior citizen FD are similar to those of a regular FD.

• Tax-Saving Fixed Deposits

Tax-saving fixed deposits offer tax benefits under section 80C of the Income Tax Act, 1961. The maximum amount you can invest in these FDs is ₹1.5 lakhs. Additionally, these fixed deposits have a lock-in period of 5 years. The tax benefits from these fixed deposits are only available under the old tax regime. 

• Corporate Fixed Deposits

Corporate fixed deposits are offered by corporate entities rather than banks. These entities may be financial or non-banking financial companies. The FD interest rates on these deposits are typically higher than bank FD rates. To reduce the risk of these investments, it is advisable to check the credit rating of corporate FDs before you make your deposit.

• Flexi Fixed Deposits

Flexi fixed deposits are flexible investment avenues that are linked to your bank savings account. If the balance in your savings account exceeds the threshold limit, the excess funds are swept into your FD account. Similarly, if the funds in your savings account fall below the threshold, the deficit is taken from the FD account. 

• FCNR Fixed Deposits

A Foreign Currency Non-Resident (FCNR) deposit is a suitable option for non-resident Indians who wish to maintain FDs in India. This is helpful if you are an NRI and want to redirect your savings in foreign currencies to India and build a safety net back home. Different banks have different terms for the currencies that can be repatriated to India through FCNR deposits. 

Top 16 Banks and Their Interest Rates

Here is a closer look at the top banks in India and the FD interest rates they offer for standard and senior citizen fixed deposits. 

Features of FD Accounts

Now that you have a fair idea of what fixed deposits are and the FD interest rates of the top banks in India, let’s take a closer look at the key features of FDs.

• Flexible Investment Tenure

Fixed deposits come with flexible investment tenures ranging from 7 days to 10 years or more. At the time of opening your fixed deposit account, you can choose the tenure over which you wish to remain invested. 

• Compounded Returns

Fixed deposits offer compounded returns over the investment tenure if you choose the cumulative FD option. This means the interest you earn on the principal is reinvested in the FD account, so you earn interest on interest. 

• Preferential Terms for Senior Citizens

Nearly all leading commercial banks in India offer preferential FD interest rates for senior citizens. The rates are generally higher by around 50 basis points, but they can vary from one bank to another. 

• Eligible to be Pledged as Collateral

Fixed deposits can be offered as collateral if you are availing of a secured loan. The terms and conditions of pledging the FD as collateral depend on the lender. However, in most cases, the loan amount is around 80% to 90% of the deposit pledged. 

• Premature Withdrawals

You can also withdraw the amount in your callable fixed deposit account prematurely before the end of the investment tenure. However, the lender may levy penalties on such withdrawals. Do note that tax-saving fixed deposits cannot be withdrawn prematurely. 

• DICGC Coverage

Fixed deposits held in commercial banks as well as small finance banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a specialised division of the RBI. The maximum amount of coverage per unique FD account is ₹5 lakhs. 

Eligibility Criteria for Fixed Deposit Investment

The exact eligibility criteria to open a fixed deposit account may vary slightly from one lender to another. However, the categories of persons who qualify for an FD account include the following:

• Resident Indians 
• Non-resident Indians (for NRE/NRO/FCNR fixed deposits) 
• Hindu Undivided Families (HUFs)
• Sole proprietorships
• Partnership firms
• Limited companies
• Societies, associations, trusts etc.

What Does Lock-in Period Mean for FDs?

Before we venture into the overall benefits and limitations of a fixed deposit account, let’s take a closer look at the lock-in period of FDs. For standard callable fixed deposits, there is no specific lock-in period, per se. The investment tenure you choose at the time of FD account opening is the maximum period over which you can remain invested. However, you are free to withdraw your funds prematurely if required (subject to any penalties in place). 

That said, there is one specific type of fixed deposit that comes with a predetermined lock-in period. This is the tax-saver FD, which offers tax savings under section 80C of the Income Tax Act of 1961. The lock-in period for these tax-saver fixed deposits is 5 years. You cannot withdraw your funds before this tenure is complete. 

What Does Loan Against FD Mean?

This is another feature of fixed deposits that you may need more clarity about. A loan against fixed deposits is essentially a credit facility wherein you borrow money by pledging your FD as collateral. The maximum amount you can borrow is set by the lender as a percentage of the fixed deposit pledged. Let’s discuss an example to make this feature easier to understand. 

Say you have a fixed deposit of ₹5 lakhs with a bank. The tenure for this FD is 3 years. At the end of the second year, you have a medical emergency in your family and require ₹2 lakhs urgently. You may be tempted to foreclose the FD, but this means you will lose out on the interest you may have earned during the third year. 

Instead, you can avail of a loan against the FD. The maximum amount you can borrow is, say, 90% of the FD amount. This means you can borrow up to ₹4.5 lakhs. However, since you only need ₹2 lakhs, you can borrow that sum as a loan against FD and keep your investment intact. 

Taxation of FD Earnings

Taxation of fixed deposits depends on the type of FD account you’ve opened. Let’s take a closer look at the details. 

Taxation of Regular FDs

The earnings from a fixed deposit are in the form of interest offered on the principal deposited. This interest is taxable as ‘income from other sources’ according to the Income Tax Act. So, it is added to your total income and taxed as per the slab rate applicable to you.  

That said, banks today deduct tax on the interest at source. If your total taxable income is below the basic exemption limit, you can submit Form 15G (or Form 15H if you are a senior citizen) to the bank. This is a request to not deduct TDS since you do not have any taxable income.

Taxation of Tax-Saver FDs

The amount deposited in tax-saver FDs is eligible for deduction under section 80C of the Income Tax Act. The maximum amount of deduction available is ₹1.5 lakhs. These fixed deposits have a lock-in period of 5 years, as mentioned earlier. Additionally, the interest you earn on these FDs is taxable as per your income tax slab. 

Advantages of FD

Now that you know what a fixed deposit is and what its key features are, it’s time to look at the benefits of this financial product. Fixed deposits offer a number of advantages, such as the following:

• Guaranteed Returns

Fixed deposits offer guaranteed returns on the amount deposited, irrespective of market cycles and economic conditions. This security can be reassuring for conservative investors who prefer to take on little to no risk. 

• Flexible Investment Option

Fixed deposits offer a great deal of flexibility to investors as well. You can choose the amount you wish to invest, the tenure of investment and even withdraw the amount prematurely if needed. This makes it easier to align your FD with your investment goals. 

• High Liquidity

Although there is a fixed investment tenure, most fixed deposits can be foreclosed if you are in need of emergency funds. You will have to pay any applicable penalty, of course, but this feature adds to the liquidity of FDs. 

• Low-Risk Investment

Since the returns are guaranteed and not linked to the market performance, the risk involved in fixed deposits is quite low. Furthermore, the addition of the DICGC insurance coverage adds another layer of security to your funds. 

• Tax Benefits

Tax-saving fixed deposits also help reduce the burden of income tax by reducing your overall taxable income by up to ₹1.5 lakhs. This is beneficial if you have income that puts you in the highest tax slab and choose the old tax regime. 

Limitations of FD

Despite its many advantages, a fixed deposit also has its own limitations, as outlined below. 

• Lump Sum Requirement

One of the main limitations of fixed deposits is that you need a lump sum amount to earn good returns. Although banks now allow you to open FD accounts with deposits as low as ₹5,000, it is generally advisable to invest a higher sum if you want to earn significant interest.

• Fixed Returns

The FD interest rates are fixed throughout the investment tenure. This can be beneficial during phases where other investments are underperforming. However, it also prevents you from earning higher returns during phases where other investments outperform the market.

• Long-Term Investment

If you do not want to pay the penalty for premature withdrawal of your FD, you will have to remain invested over the investment tenure. This may be several years, depending on the tenure you chose at the time of opening the FD.

How to Open an FD Account?

Once you weigh the pros and cons of fixed deposits, you can make an informed decision about opening an FD. If you decide to go ahead, you may need to follow the general procedure to open an FD as outlined below. 

Opening an FD Online:

• Log into your bank’s internet banking portal. 
• Look for the option to open a new fixed deposit and select it.
• Fill out the online FD opening form with the required details such as the particulars of the FD and your personal information. 
• Upload the soft copies of any other documents that may be required. 
• Fill out the nomination details. 
• Submit the application form along with the required documents to open your FD.

Opening an FD Offline:

• Visit the branch of the bank with which you wish to open an FD. 
• Ask for the FD account opening form and fill out the details required therein. 
• Along with this form, attach any other documents and proofs that may be required. 
• Submit the above paperwork along with the cash or cheque for the amount you wish to deposit. 

FD Calculator

Before you open a fixed deposit, you need to check the FD interest rates and understand how the amount deposited will grow over time. An FD calculator can help you with this. To use this free online tool, you only need to enter the following details: 

• The investment amount
• The FD interest rate per annum
• The tenure of investment 
• The compounding frequency 

Once you submit these details, the FD calculator will show you the maturity amount and the total interest you will earn from the deposit over the tenure chosen. This will help you plan your FD investment easily and ensure that it aligns with your financial requirements. 

Who Should Invest in Fixed Deposit?

You may be unsure of whether or not a fixed deposit may be the most suitable investment option for you at the moment. To resolve this dilemma, it helps if you know who should invest in an FD. Broadly, a fixed deposit may be worth considering if:

• You seek a safe and low-risk investment option
• You want fixed and predictable returns on your savings
• You are risk-averse
• Your goal is capital preservation
• You want to save up for a specific goal 
• You want a safe investment avenue with tax benefits
• You are comfortable with a lock-in period for your investments 
• You require a guaranteed regular income

FD or ELSS – Which is the Best?

If your primary aim is to save tax, you may have to choose between various tax-saving options available in India. Two of these — tax-saver FDs and equity-linked savings schemes (ELSS) — can be tough to choose between. That said, they have very distinct features, as shown in the table below. 

The bottom line is that ELSS may be a suitable option if you are looking for a shorter investment horizon and are comfortable taking on more risk. However, if you are risk-averse and do not mind a longer lock-in period, tax-saver FDs may be suitable instead. 

Conclusion

This sums up the details of what a fixed deposit is, the different types of FDs available and all the features and benefits of this financial product. If you are just getting started on your investment journey, a fixed deposit is one of the most fundamental options to add to your investment portfolio. Alternatively, even if you are a seasoned investor with heavy equity investments, fixed deposits can bring a degree of stability to your portfolio. 

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